By Vasundhara Jain

It is a shrewd world, and in this world money matters. Money matters even to terrorists, even more so for them because it is crucial for their existence. What makes their financial system sound? How do they organize their accounts and keep the cash flows going? Here is how an economist would analyze it.

Terrorism today involves networks that wage “politically motivated, asymmetric violence against… civilian and administrative targets”, according to researcher and author Brian Forst. The global fight against terror has been gaining momentum for a few decades now, and studies against terror help in formulation of right policies. Which economic fundamentals does terrorism feed on to keep its business running, is a question worth asking.

The official 9/11 Commission Report estimated $500,000 cost to execute the attacks. Some independent research estimates for London bombings in 2005 are around just $2,000 while those in Madrid train bombing are estimated around $10-15,000. The 2002 Bali club blasts costed around $50,000 as per UN estimates. Thus significant amounts of financial resources are required by terrorist organizations as ‘operational costs’. There are also large ‘organization costs’. The bulk of money goes into organizational costs – take for example US’s estimate of HAMAS’s annual budget, which is at $50 million and that of Hizballah is around $200 million (Levitt, 2005).

Post 9/11, the Financial Action Task Force on Money Laundering set out specific recommendations to countries, aiming at identification, detection and freezing of funds aiding terrorism. This required the countries to formulate legislation that would criminalize terrorist financing, develop internal controls to monitor cross-border physical transfers of money and money instruments and even prevent financial institutions from supporting terrorist activities.

Following stricter legislation and vigilance norms, terrorist organizations’ structures are becoming much flatter – this increases the number of attacks in the short term, but reduces the overall impact of these attacks as the organization’s attacks. There is a short-term trade-off when opposition to terror is increased. Moreover, if we were to go by statistics on the Irish People’s Liberation Organization, in periods of truce, non-terrorist attacks such as homicidal killings go up, but the overall incidences of violence remain constant. Once a rebel group has adopted a particular tactical approach, their movement away from the initial choice is only to reduce costs, and policy makers are thus confounded with the usual cost-benefit analysis when countering terror outfits.

Moreover, researchers also contend that terror attacks have a

Sources of Funds:
1) State sponsors of terrorism: The US Department of State lists four countries as state sponsors of terrorism: Cuba, Syria, Iran and Sudan. Why do states sponsor terrorism? Well, firstly, an organization whose acts are aligned with that of its supporting state’s, help in furthering their ideology of governance, help in resetting diplomatic relationships, or simply destabilize a the state’s neighbors. Pursuance of their personal goals implicitly furthers the aims of a state. The state provides arms, protection, finance, and intelligence support. And what’s more, the state does not have to take responsibility for the actions of these so-called ‘independent’ terror-promoting organizations. In a terms of strategy and diplomacy, a game theorist would call this a winning element of private information which only the sponsor state has. This creates uncertainty in dealings and possible diplomatic actions remain hung and the terrorists continue to realize their goals relentlessly, along with the sponsor state’s hidden goals.

2) Drug Trafficking: According to UNODC’s Afghanistan Opium Survey (2007), the profits from opium trade were heavily involved in financing of the Taliban. The total value of opium and heroin trafficked in Afghanistan that year was an estimated $4 billion. Similarly, the Revolutionary Armed Forces of Colombia, designated by USA as a foreign terrorist organization, have been long known to be sourcing large amounts of funds from cocaine trade. Most terrorist organizations help the drug traffickers with the logistics, cross-border drug and cash movements and money laundering. Money laundering is crucial to transferring money across borders safely without leaving a trail. From a pure theoretical perspective, liberalizing drug trade would make the drug trade less profitable and the increased competition would erode the high markups and windfall earnings. This would deter terrorists from using this as a source of possible funding. However as it is not a very practical solution to liberalize drug trade due to other security and health reasons, another preventive measure to mitigate this trade is to increase control against money laundering which would make money trails traceable, and illicit trade more difficult.

Hawala systems used for Money Laundering are quite a challenge to tackle, and by itself a form of illicit trade as it evades taxes and monitoring. A Hawala system basically involves transmission of money using a large network of brokers across countries that maintain accounts with each other and can be approached by a client, payment is made to a broker in one country while the broker’s partner in the recipient’s location pays to the final recipient, adding on a brokerage fee. There are no written records of this system and it works completely on faith, making it impossible for vigilance agencies to track large money transfers across countries. UN’s International guidelines are now asking countries to record the hawala and alternate money transfer systems.

Dawood Ibrahim, who has been the third most wanted criminal in the world since 2003, and leader of “D-Company”, a crime group, is known to be in control of the hawala system in the Middle East and the Indian subcontinent. He has helped the Al-Qaeda and the Lashkar-e-Taiba. According to the US government, he shares smuggling routes with Al-Qaeda. The 2008 Mumbai attacks terrorist Ajmal Kasab (member of Lashkar-e-Taiba or LeT, a highly active terrorist organization in South Asia) confessed that Ibrahim provided LeT with arms and explosives. Ibrahim’s finances come from many trades: illicit drug and smuggling on one hand,  the aforementioned hawala system. He has also been long alleged for using a rather innovative money laundering scheme – through investments in Bollywood movies through innocent looking non-traceable front companies.

3) Other illicit trades: such as piracy. Piracy in itself arises from a market failure to meet the demand in a convenient manner. Steve Jobs believed that given a reasonable choice, people would not indulge in piracy. Although the advance in technology to provide content anywhere at anytime at a reasonable cost has saved music companies considerably in the digital age, movie and music are still being repackaged to more trade-convenient forms to surpass piracy.

4) Wealthy Donors. When Bin Laden, met Dr Yusuf Azzam, in the anti-Soviet jihad in Afghanistan and together they set up Maktab al Khidamat (front-runner of Al Qaeda), bringing in recruits to Afghanistan from around the world, especially the Arab world, Bin laden is known to have used a vast network within Saudi Arabia (his home country) and much of Gulf countries to source funds. However he was ousted from the country when he protested Saudi Arabia’s alliance with USA against the Iraq in 1989, allowing US troops to stay in Saudi Arabia rather than taking Laden’s offer of his Afghani troops that were fresh out of the war against the Soviet Union. He found a safe haven with the Taliban, offering them his fund-raising networks and assistance.

5) Corrupt charities that redirect donated money to support terror remain other major source of funding for terrorist organizations. Reigning in their immoral activities remains a case for stricter international vigilance and compliance.

There also remains a trade-off when one analyzes the benefits of state interventions in the name of security and associated social costs due to loss in liberty and privacy. Sandler and Enders found that there may be substitution possibilities in anti-terrorist policies, i.e., deterring specific terrorist activities such as attacks on embassies may actually increase other forms of terror such as increased shootings in Kenya and Tanzania in the 1990’s.

Eldor and Melnick, market liberalization in Israel increased their economy’s power to deal with terrorism. Furthermore, if anti-terror policy becomes unpredictable, Sanjay Jain and Sharun Mukand found that this could increase the uncertainty facing terrorists and lead to a “Pareto-superior outcome, at minimal resource cost to the government”. Interestingly, further research has found that having decentralized governance reduces terror attacks as terrorists have a reduced payoff from rebelling against a government, which does not have an outright war against terror.

We are playing on imperfect knowledge – but it is the best we can do.

Vasundhara Jain is currently pursuing Masters in Economics at the University of Warwick, UK. She has interned at the State Planning Commission MP, where she specifically studied how the banking system met the growth needs of the state. She has volunteered in different capacities at several NGO’s, including ones for development of underprivileged children, and for HIV+ and rehab-seeking residents. . Her further interests including traveling, writing and playing squash. She blogs at www.vasujain.com, and can be contacted at vasu@vasujain.com.

Posted by The Indian Economist | For the Curious Mind